Global Economics

In Recession, Focus on Emerging Markets

By focusing on rapidly developing economies during this global slowdown, Western companies can turn economic crisis into global advantage

If anything is certain in these times of extraordinary uncertainty, it's that the current economic downturn is global in scope and will be felt the world over for quite some time. It's hard to miss this fact if you watch television, read a newspaper, or surf an Internet news site in any country. The stark reality stares you in the face. While we have weathered economic storms before, this one is radically different because it is truly global, reflecting an interconnected economic system where little happens in isolation. Virtually everyone, everywhere is affected by everything.

First, while worldwide economic growth is expected to drop from 5% in 2007 to 3% in 2009, according to International Monetary Fund projections, there is a significant difference between projected gross domestic product "growth" in the developed economies of the U.S., Western Europe, and Japan—all of which have already tipped into recession—and those in the rapidly developing economies (RDEs). Economic growth in the developed economies is expected to decline by half of a percent, while the RDEs are expected to post an average growth rate of 6.1%. Both projections may prove overly optimistic, but the key point is that the RDEs are expected to grow next year, while the developed economies are not.

Second, the global economic downturn is taking place in the new era of "globality," with companies everywhere competing with everyone for energy, raw materials, skilled and unskilled workers, management talent, scientists and engineers, knowledge, financing, customers, markets, and virtually everything else. The West no longer calls all the shots.

This radically new landscape means U.S. and other Western companies face a different set of challenges and opportunities than during previous recessions. While most executives are familiar with the challenges they face with recession marketing, far fewer have thought about the opportunities a worldwide recession creates that can turn economic crisis into global advantage.

The Trading-Down Phenomenon

The first major opportunity relates to cost. During these times of economic uncertainty, businesses and consumers in the U.S. and Europe are "trading down," choosing lower-priced goods. A recent Boston Consulting Group survey, for instance, found that consumers are trading down in almost every category, from mobile phones to snack foods.

Because of the trading-down phenomenon, companies will rely even more on RDEs, where production costs are 20% to 30% lower than in the developed economies. Although labor rates have increased in recent years, they are still a fraction of what they are in Western Europe and the U.S. Rising productivity, declining bulk shipping costs, and falling currency exchange rates, particularly against the dollar, increase the RDE cost advantage.

The second opportunity is for global engineering and capital-goods companies to capture business in the RDEs by focusing on their massive investments in infrastructure. China, for instance, is building upwards of 100 new airports, 186,000 miles of new roads, 75,000 miles of new railroad tracks, and may add additional projects, according to news reports, to make up for the slowdown in consumer goods exports. China also plans to expand port capacity by 85% between 2010 and 2020. This creates a huge opportunity for U.S., European, and Japanese companies. Similarly, India's government has plans to invest up to $460 billion on infrastructure in the next five years. Overall, infrastructure spending in India could increase from 5% to 9% of GDP by 2012.

Although not as substantial, the other two BRIC countries—Brazil and Russia—are also planning to make hundreds of billions of dollars in infrastructure investments over the next several years.

Substantial Opportunities

All told, rapidly developing economies could spend as much as $6.6 trillion on infrastructure in coming years, according to Merrill Lynch estimates. Some of the projects could be delayed or canceled as a result of the global slowdown. Regardless, the opportunities are substantial.

The third major opportunity involves providing goods and services to consumers in rapidly developing countries. Despite the global slowdown, consumer spending is still increasing in the RDEs and Western companies have an opportunity to increase sales both to the growing middle class and the tens of millions of people who are emerging from poverty each month and becoming consumers for the first time, the so-called "Next Billion" consumers.

With more than 1.3 billion people in China, 1.1 billion people in India, 190 million in Brazil, 140 million in Russia, 85 million in Vietnam, 71 million in Turkey—and hundreds of millions more in other rapidly developing countries—the potential is huge, even in these tough times.

Until recently the Next Billion consumers were barely able to buy the things necessary for survival: food, clothing, and housing. But now their incomes are growing at a faster rate than the economies in which they live. Already as much as one-third of their spending goes to purchasing better products and premium brands. They're now buying name-brand personal-care and household products. They're either purchasing or saving their money to purchase consumer electronics and appliances. And, most important, they're young, with upwards of 40 years of consumer spending ahead of them at a time when their incomes are growing.

So what steps should businesses take to weather the economic storm and take advantage of these counterintuitive opportunities? They should:

Push intelligently toward more low-cost country offshoring, sourcing, and manufacturing. Since businesses and consumers are trading down to lower-priced goods, the RDEs' low production costs are essential to reducing overall costs and serving cost-conscious consumers.

Diversify, or "pinpoint," your operations globally to take advantage of the specific strengths of different locations. Companies need to localize operations as much as possible to keep them "lean" and optimize labor-capital tradeoffs.

Remain sensitive to commodity prices. Despite recent sharp drops in commodity prices, caused by the global slowdown, they will increase in the long run as the rapidly developing economies grow.

Pay close attention to the RDEs' new consumers. Create goods that meet the needs of people living in small spaces with limited budgets and unreliable utilities.

Take advantage of merger-and-acquisition opportunities if you can, since downturn mergers typically create value, while upturn mergers typically destroy value.

Improve your global talent base. At a time when many firms are struggling, companies have a better opportunity to attract top talent, something that is often difficult in the RDEs in booming times.

Look to the future despite the challenging circumstances that face you today. Understanding what your company should look like in five to 10 years should determine your current path.

The financial crisis is affecting every business, every sector, and every country differently. But make no mistake: In this era of globality, it is affecting everyone. Companies able to weather the storm and take advantage of the opportunities it creates will come out stronger than ever.